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POSTED BY ON August 7, 2011 2:42 pm COMMENTS (5)
Suppose I start a monthly SIP of Rs.1000 in a mutual fund and it gives me 25.33% annualized SIP return after 10 years what does it mean?Does it mean 25.33%/10= 2.533% return per year?
SBI offers RD @ 9.25% for 10years(Source:http://www.statebankofindia.com/user.htm).It appears to be better option if the mf return is 2.533% per year.
I have seen some complex mathematical formula to calculate total return of a mf in some sites.Can anybody explain in layman’s terms?
I know mf investments are not risk free and I am not afraid to take it.My concern is if it is worth the risk?Thanks in advance.
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Just one more thing how do you add smily in your post and your profile picture?
Thank you for answering so clearly.It appears that investing in mf SIP is worth taking the risk.I hope your answer has cleared the doubts of many beginners like me.
As I mentioned I am not afraid to take the risk and I am not looking for guaranteed returns( for this I would have been happier with bank fd/rd and never asked the question).In the question I have used the 10 years annualized return of Franklin India Bluechip which is a large cap fund.I know past performances are only indicative and not conclusive.I think 10-12% annualized return is quite achievable in 10years if one chooses the funds carefully.
What do you think?Looking forward for your answer.
Regards.
For long periods of investment, it has been time and again shown that equity as an asset class gives you the best return.
On the contrary, when does it not give returns:
1. When there is very less diversification. Say 5 stocks only. Then, atleast one of the stock is having 20% of your stock portfolio, and if it goes bust because of fudged accounts (eg Satyam, Enron in US) or because of association with scams directly (eg Money Matters FS) or indirectly (recent Adani and Jindal stocks), your portfolio suffers severely. So what is the lesson here, Have a proper diversification within equities. Proper in terms of sectors, caps, time (SIP does this, staggered lumpsums also does this), even countries, if possible.
2. People tend to have a herd mentality. When the markets are rising, they will invest at any level. When the markets are falling, they will sell at any level. So most people tend to invest at high levels and sell at lower ones. Remedy: Have a written investment system on how will you behave and what are your purposes. Understand investment and speculation differences, and dont mix them. A regular SIP helps you there. Dont stop the SIPs because of fall of markets, that is actually the better time to invest.
3. An overdiversification (eg, having 10 equity MFs) also gives you lesser returns. How? An overly diversified portfolio gives you a near index-like return but at the cost of active management fees of 2-2.5%. So over a long period of time, your total return will lag the index. By not much, though.
4. Again, the lesson is have an optimum number of MF. In my opinion, 2-4 different styled MF are enough.
Equity MF give you a proper diversified (provided they are not thematic/sectoral/capped) basket of stocks, at a quite reasonable management fees. Make use of them.
Keep learning. keep investing.
Ramesh
In mathematical terms, a monthly investment of 1000 per month for 10 years will:
1. @ 25.3% annualized return will give you 5.3 lakhs (vs total investment of 1.2 lakhs).
2. @ 9% annualized return will give you 1.9 lakhs (vs total investment of 1.2 lakhs).
Also, remember, the return in a MF is not guaranteed, while in SBI it is fairly certain (because of its AAA rating) 😉
Over a long period of time, do not expect such a high return, it is an anomaly. Over the last 20 years, the sensex has provided 17% returns!!
@Trishit Ray,
Annualized returns of 25.33% would mean 25.33% every year. Its not 2.533%! The way banks communicate thier FD rates per year, Equity MFs also communicate yearly returns. But since they don’t offer guarantee, are meant for long-term & tend to be volatile, they typically communicate CAGR (i.e. compounded annual growth-rate), also called annualized returns.
We at moneysights.com observed that most people tend to interpret this incorrectly as you did. Hence we communicate it as YOY i.e. Year-on-Year returns. So at moneysights, you will never see CAGR or annualized returns as a term 🙂
Hope this helps.
Thanks!
—
Santosh Navlani | moneysights.com